Strong profit growth drives Transurban Group shares higher

In morning trade the Transurban Group (ASX: TCL) share price has climbed 1% to $$11.46 following the release of the toll road operator’s half-year results.

For the six months ended December 31 Transurban reported a 10.5% increase in proportional toll revenue on the prior corresponding period to $1,176 million and an 11.6% increase in proportional earnings before interest, tax, depreciation and amortisation (EBITDA) to $911 million.

During the period the company saw a 1.4% increase in average daily traffic (ADT) on its network of roads thanks largely to its Sydney division. ADT on its Sydney roads increased by 2.9% to 667,000 trips, with growth seen across all assets. This led to proportional toll revenue from its Sydney division increasing by 9.8% to $476 million.

The company’s Melbourne roads performed strongly as well despite a fall in traffic. Proportional toll revenue increased by 14.2% to $388 million, while ADT decreased by 1% to 820,000 transactions. The fall in traffic was due to the negative impact of the CityLink Tulla Widening works. This didn’t stop EBITDA in the division increasing 17.5% on the prior corresponding period.

Elsewhere, its Brisbane roads delivered a 3.5% increase in proportional toll revenue to $200 million on the back of a 3.5% lift in ADT. And its Greater Washington roads generated proportion toll road of US$87 million, up 17.9% on the prior corresponding period thanks to a 3.4% lift in ADT.

As a result of this strong first-half, management has advised that the board has declared a 28 cents per share distribution that will be paid to eligible shareholders on February 16. This will consist of a 25.5 cent per share distribution from Transurban Holding Trust and a 2.5 cents per share fully franked dividend from Transurban Holdings Limited.

Looking ahead, management has provided full-year distribution guidance of 56 cents per share, representing growth of 8.7% on FY 2017’s distribution.

Should you invest?

I think Transurban is a fantastic company and its near-monopoly on Australian toll roads makes it a very attractive investment option.

However, I do think its shares are a touch expensive at the moment given the outlook for rising rates and widening risk-free bond yields. In light of this, I would class Transurban as a hold and intend to wait and buy in at a cheaper price in the future should an opportunity present itself.

In the meantime, I see more value in dividend shares like WAM Capital Limited (ASX: WAM), Sydney Airport Holdings Pty Ltd (ASX: SYD), and Aventus Retail Property Fund (ASX: AVN).

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited. The Motley Fool Australia has recommended AVENTUS RE UNIT and Transurban Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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